Illinois gets S&P warning on coronavirus-driven perils to its rating

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Threats to Illinois’ investment grade rating are intensifying as prospects for a new round of federal relief in the near future dims and structural budget woes mount, S&P Global warned in a bulletin published Monday.

“The odds of Illinois balancing its budget without additional borrowing or a sizable increase in the bill backlog are looking slimmer as congressional agreement on further federal assistance remains elusive,” read the report from the primary Illinois analyst Carol Spain and secondary analyst Geoffrey Buswick.

“With the need for additional borrowing, an elevated bill backlog, and lingering substantial structural imbalance, Illinois could exhibit further characteristics of a non-investment-grade issuer,” they wrote.

S&P analysts Carol Spain, middle, and Geoffrey Buswick, left, are the primary and secondary analysts, respectively, on Illinois.

Illinois is rated at the lowest investment grade rating by S&P as well as Fitch Ratings and Moody’s Investors Service. All three assign a negative outlook. The state has seen more than $6 billion of tax losses in the last and current fiscal years due to the COVID-19 pandemic.

The $43 billion general fund budget relies on $5 billion in federal relief and $1.27 billion from additional income tax revenue that would be received in the second half of the fiscal year if voters approve allowing the state to move to a progressive income tax rate.

Gov. J.B. Pritzker included the $5 billion authorization to borrow through the Federal Reserve’s Municipal Liquidity Facility in advance of federal funds. In the absence of federal help to make up for tax revenue blows, Pritzker has warned of deep cuts. If voters reject the constitutional amendment, the state could tap an existing borrowing long-term bonding to make up the $1.27 billion difference.

Borrowing through the MLF provides only cash-flow relief and the state could struggle to repay the debt within the three-year term offered by the program, S&P warned. Any strains on the state’s market access could also add to pressures.

The budget team directed agency heads last week to reserve 5% of their allocated 2021 funding levels and to craft both a maintenance budget and one with a 10% cut for fiscal 2022.

“The lack of additional federal stimulus increases the likelihood of a worse economic outcome. Furthermore, potential layoffs at state and local government levels could contribute to a lasting drag on Illinois' economy,” S&P said.

Analysts will be closely watching for the results of the November referendum and action the legislature might take during its annual veto session slated for later that month.

“We expect lawmakers will act based on the outcome of the graduated income tax measure, likelihood of federal assistance, and revised fiscal estimates,” the report said.

The warning signs watched closely by rating agency analysts are also coming from the state’s growing bill backlog that stood at nearly $7.7 billion Monday. That’s up from $5.4 billion at the start of the fiscal year July 1 and the highest since fiscal 2018.

The backlog hit a high of $16.7 billion as the bills mounted in 2017 from the state’s two-year budget impasse and the state faced litigation from health providers.

“As spending continues at budgeted levels without federal funding, the state's cash deficit will
continue to grow,” the report said. “As delayed payments mount, we think it is likely that Illinois will issue bonds or again borrow through the MLF to meet cash requirements.”

The rating agency also offers an increasingly grim assessment of the state’s longer-term prospects even should Congress eventually agree to a new relief package, suggesting the administration should have sought out structural measures to deal with its revenues losses.

“The magnitude of the current budget gap and reliance on one-time measures make us question
Illinois' ability to achieve structural balance in a reasonable time. Even if Illinois receives federal
aid in fiscal 2021, we expect that it will face challenging budget gaps beyond the current fiscal
year,” S&P wrote.

Other risks abound including the potential, depending on investment performance, for the state’s $137 billion pension tab to grow. The state’s borrowing of $1.8 billion from the federal government to replenish its unemployment fund could also limit the state’s ability to enact further general fund increases on corporate taxes or cause the state to incur further debt.

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